When Are Non-Competes Enforceable?

Whether a restrictive covenant, like a non-compete clause, is enforceable depends on the context. In Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388, Justice van Rensburg of the Ontario Court of Appeal upheld the trial judge’s decision to enforce the restrictive covenants placed on a dentist after he sold his practice. 

In her reasons, Justice van Rensburg notes that courts will give more scrutiny to the reasonableness of a restrictive covenant in the employment context. Conversely, when looking at restrictive covenants in the context of a sale of a business, courts will apply the presumption of validity to such clauses. Everything depends on the nature of the business, and each case must be assessed in light of its own circumstances.

The purpose of a restrictive covenant in the context of a sale of a business is to protect the goodwill from being devalued. Goodwill includes the existing customer base and the ability to attract new patients from within the area served by the business.

As a general rule, the territory to which a reasonable restrictive covenant applies is limited to that in which the business being sold carries on its trade or activities as of the date of the transaction. It is common for agreements for a sale of business, such as a share purchase agreement, to specify the territorial limit in terms of a geographical radius and to outline the radius in kilometres. 

Justice van Rensburg states that when two competently advised parties with equal bargaining power enter into a business agreement, it is only in exceptional cases that the courts are justified in overruling the parties’ own judgment of what is reasonable. The parties to a commercial agreement for the purchase and sale of a business are best placed to determine what is reasonably required to protect the purchaser’s interest in the goodwill.

In sum, where the parties’ agreement is the best and most reliable expression of their joint intention, the non-competition covenant will be treated as presumptively legal.